What Happens When a Company Files for Bankruptcy: 7 Consequences for Owners and Creditors

Filing changes who may touch a company's money well before it changes how much the company owes. For the owners, the employees, the landlord and the funders who took a lien on receivables, the first weeks of an entity's bankruptcy are a rearrangement of permissions, and most of the surprises come from assuming that the old permissions still hold.

The consequences below apply to an LLC or corporation that files under Chapter 7 or Chapter 11. Where the two chapters diverge, the difference is noted.

1. The Stay Protects the Company and No One Standing Beside It

The automatic stay in 11 U.S.C. 362(a) halts lawsuits against the debtor, enforcement of judgments against it, acts to take control of estate property and acts to collect prepetition claims. The debtor is the company. In Queenie v. Nygard the Second Circuit repeated that such stays are limited to debtors and, apart from narrow circumstances a court must be asked to find, do not extend to others.

An owner who guaranteed the company's merchant cash advances therefore wakes up the morning after the filing exactly as exposed as the night before. A funder that cannot sue the company may sue the guarantor, and nothing in the company's petition prevents it.

2. The Old Bank Accounts Close and the Cash Acquires Conditions

A Chapter 11 debtor in possession operates under guidelines issued by the regional office of the United States Trustee. Region 21's February 2026 operating guidelines, for example, state that "the debtor must close its prepetition bank accounts and open new debtor-in-possession accounts," keep them, absent court authorization, at depositories that bond or collateralize uninsured deposits, and produce proof of the closures along with a list of every disbursement and transfer in the 90 days before the petition. Other regions publish their own versions, and a court can authorize departures.

The harder constraint is the money itself. If a lender or funder holds an interest in the company's receivables or deposit accounts, the cash those assets generate may be "cash collateral" under section 363(a), and section 363(c)(2) forbids the debtor to use it unless each entity with an interest consents or the court authorizes the use; section 363(e) then lets the secured party demand that any use be conditioned on adequate protection of its interest, which means that a restaurant filing on a Thursday, with payroll due Friday and a funder's lien recorded against every card receipt it collects, may find that the question of whether it can make payroll is answered not by its balance but by whether a judge has entered an order, or the funder has signed a stipulation, before the checks go out. Whether a particular advance created such an interest is a question about the contract and the filing. The statute assumes nothing on the funder's behalf.

3. Employees Are Paid Ahead of Most Creditors, Up to a Cap

One hundred eighty days is the window that governs. Section 507(a)(4) grants fourth priority to unsecured claims for wages, salaries and commissions, including vacation, severance and sick leave pay, earned within 180 days before the petition or the date the business stopped operating, whichever came first, up to $17,150 per individual (the figure as adjusted April 1, 2025). Anything above the cap is a general unsecured claim.

Taxes withheld from those wages are another matter. They carry their own priority under section 507(a)(8)(C), and the individuals responsible for paying them over may face personal liability under 26 U.S.C. 6672 that the company's case does nothing to resolve. A company that closes a site may also owe advance notice to its workers: the federal WARN Act requires 60 days for covered employers of 100 or more, and New York's statute requires 90 days for covered employers of 50 or more, each with thresholds and exceptions of its own.

4. Every Contract and Lease Must Be Kept or Given Up

Section 365(a) allows the debtor, with the court's approval, to assume or reject its executory contracts and unexpired leases. A contract in default can be assumed only if the default is cured, or adequate assurance of a prompt cure is given, along with adequate assurance of future performance. Section 365(e) blocks the other side from terminating or modifying a contract solely because of a clause triggered by insolvency or the filing.

A commercial lease on which the company is tenant is deemed rejected, and the premises must be surrendered, unless the debtor assumes or rejects it within 120 days of the order for relief or by plan confirmation if sooner; the court may add 90 days for cause, and further time only with the landlord's written consent. The arrangement works the way a coat check works at a wedding: the ticket holds the coat only until the hall closes, and the hall closes on schedule.

5. Lienholders Keep Their Liens and Gain a Voice

A creditor with a security interest does not lose it because the company filed. It may ask the court for adequate protection of its interest, and section 362(d)(1) directs relief from the stay for cause, "including the lack of adequate protection." If the debtor needs new financing, section 364(d) allows a lien equal or senior to an existing one only if credit is otherwise unavailable and the existing lienholder's interest is adequately protected.

The trustee or debtor in possession also holds powers the lienholder must answer to. A lien that was never properly perfected, or payments received in the 90 days before the petition that meet the elements of a preference, can be challenged, though whether any given merchant cash advance remittance qualifies is disputed and turns on facts this page cannot supply.

6. Owners Stand at the End of the Line

A company in Chapter 7 receives no discharge, because section 727(a)(1) grants one only to individuals. Its assets are gathered and distributed in the order of section 726, and the final category, after priority claims, general claims, late claims, penalties and interest, is "to the debtor," which is to say the owners, if anything is left. Owners should not plan around that category.

In a traditional Chapter 11, the absolute priority rule keeps owners from retaining their equity over a dissenting unsecured class that has not been paid in full. Subchapter V lets a qualifying company, one with no more than $3,424,000 in qualifying debts under the figure adjusted April 1, 2025, confirm a plan over dissent without that rule; Congress had passed differing House and Senate versions of a bill to raise the limit, not yet law on September 27, 2026, and counsel should confirm the figure at filing.

7. The Company Starts Reporting to Strangers

A small business debtor in Chapter 11 must attach to its petition its most recent balance sheet, statement of operations, cash-flow statement and federal income tax return, or a sworn statement that none exists. Its senior management must attend the initial debtor interview and the meeting of creditors, keep insurance, file tax returns on time, and permit the United States trustee to inspect its premises and books. Monthly operating reports follow, and a traditional Chapter 11 case pays quarterly fees to the United States Trustee Program; a Subchapter V case does not. The first report is due before the owner has finished reading the guidelines.

What the Company's Filing Leaves Unfinished

An entity's bankruptcy can resolve the entity's debts, but it leaves the guaranties standing. Delancey Street works on negotiated resolutions of merchant cash advance debt outside court and begins with a review that costs nothing and stays confidential; as a settlement company and not a law firm, it neither files cases nor appears in them. A company already in Chapter 11, or facing seizure of its accounts, needs bankruptcy counsel directing every step, including any discussion with its creditors. The permissions have been rearranged, and the owner is now one of the people asking for them.